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Wherein the WSJ Editorial Page and I (Sort of) Agree

The good little crony capitalists at the Wall Street Journal editorial page praised the OCC/OTS/Fed settlement with mortgage servicers today, calling it a responsible resolution that didn’t simply score “political points.” I have a piece in The American Prospect today that comes to a rather different assessment:

The banks’ sentence is confoundingly light: They have to promise not to do any of this criminal activity again, and they get to set their own terms for compliance. As The Nation’s Chris Hayes said on MSNBC when the order was leaked last week, “Imagine for a moment all the people accused of robbery in this country who would happily take the same deal.”

It gets worse. The consent decree holds out the possibility of future monetary sanctions, but only through an outside review from an independent third party — paid for by the banks themselves — that will determine how much money each servicer must pay back homeowners for wrongful foreclosures. If the bank-funded investigator finds no wrongdoing, the investigation would end there. In fact, that outcome would likely be a prerequisite for the bank to hire the investigator. To extend Hayes’ metaphor, the robber would only have to do jail time if someone funded by the loot concluded that he stole it.

The WSJ op-ed predictably relies on the economists’ study released this week to argue against penalties on the servicers for their illegal conduct, particularly mandated principal write-downs. You know the study: the one that was funded by the financial services industry.

But I think the WSJ would be pleased to know that we sort of reach the same conclusion, albeit in a roundabout way. We both, for instance, think the federal consent decree was on balance a good thing. They think so because it protects bank profits; I think so because it provides an opportunity for actual accountability on the banks. The consent decree, designed to subtly undermine the 50 state AG investigation, unshackles those law enforcement officials from undertaking real investigations and filing real cases to pressure the banks. These may take longer, but through discovery they may actually uncover the extent of the problem, instead of an uncertain settlement that would amount to a slap on the wrist.

What’s more, there’s some value in the consent decree. First of all, the separate orders against LPS and MERS, while they provided no penalty either, establishes a fact pattern of misconduct by those companies which will allow homeowners, foreclosure defense lawyers and possibly even county recorders to challenge both foreclosures and big bank fee avoidance in court. And while I find the “penalty” on the servicers to be toothless and ridiculous – they get to design it themselves – there’s enough pressure on them that I do think dual tracking will be a thing of the past. And that’s good news for struggling homeowners.

Dual tracking refers to a common bank tactic. When a borrower in default seeks a loan modification, the institution often continues to pursue foreclosure at the same time.

Lenders contend that dual tracking simply protects their investment if the homeowner is unable to qualify for new loan terms. Mortgage servicers can lose money if they don’t foreclose in a timely manner, and repossessions often are complicated and lengthy.

But regulators and consumer advocates say the practice lulls some homeowners into thinking they are no longer at risk of having their homes taken away. Regulators are now aiming to curtail the practice as part of an overhaul of the foreclosure system.

“We don’t think that a homeowner who is making a good-faith effort to work through their troubled mortgage should have the roof ripped out from over them while they are negotiating, or trying to negotiate,” said Geoff Greenwood, a spokesman for Iowa Atty. Gen. Tom Miller.

The consent decree mandates an end to dual tracking, and some banks, like BofA, already said they would end the practice. This is literally the least the banks can do, but every step forward is, well, a step.

I’m more interested now in how law enforcement officials in the states and the courts will react to the continued sloppy paperwork going forward, rather than any additional weak settlements.

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David Dayen

David Dayen